Tech, bank earnings to test economic recovery

Several key players in S&P 500’s two largest cap sectors report

SAN FRANCISCO (MarketWatch) — Investors will get an early preview on whether corporate America backs a rosier economic picture this week as key players in the S&P 500’s two largest sectors — tech and financials — report quarterly results.

Of the seven Dow Jones Industrial Average
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components reporting this week, four represent the tech or financial sectors. Similarly, roughly half of the S&P 500 Index
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companies reporting earnings this week fall either in the tech or financial camp.

While some may argue the bar is always lowered for companies leading up to earnings season, performance expectations are higher than usual following the pass investors gave many companies in the weather-beaten first quarter and stocks trading near record-high valuations.

Stocks are coming off a rough week with the Dow industrials finishing down 0.7%, the S&P 500 off 0.9%, and the Nasdaq Composite Index
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declining 1.6%. Even though Federal Reserve minutes revealing the central bank will end monthly bond purchases in October provided some lift, other factors including renewed worries about Portugal and a selloff in so-called momentum stocks put pressure on markets.

Second-quarter earnings growth for the S&P 500 stands at 4.6%. If the average “beat” over the past four years applies to this season, we could be looking at 7.7% growth by the end of the season, notes John Butters, senior earnings analyst at FactSet. Earnings, however, will still take a back seat to other factors.

Show me the outlook (and revenue)

“It’s cliche but true...it’s all about the guidance,” said Nicholas Colas, chief market strategist at ConvergEx. Also, earnings “beats” will continue to be taken with a grain of salt in favor of revenue growth, which is seen by many as a more accurate metric of corporate health amid accounting tricks and stock buybacks.

Lately, negative guidance, while still high, has been on the decline. Seventy-six percent of S&P 500 corporate outlooks are negative for the second quarter, compared to the 66% five-year average, according to Butters. Still, that’s well below the 84% seen in the first quarter of 2014 and the 88% in the fourth-quarter of 2013.

Colas expects the standard 65% to 70% of companies to “beat” earnings estimates this season. Other investors have grown accustomed to this and that throws much more light on how companies have grown revenue, he said. Even so, not much is expected in that area this quarter with most analysts banking on more revenue growth in the second half of the year.

That’s evident in how revenue growth has fallen short even while earnings manage to move forward. Even with expected 4.6% growth in earnings for the S&P 500, revenue is only expected to rise 2.7% in the second quarter.

FactSet

Tech: The biggest cog in the market to set the tone

With the largest total market cap of the S&P 500’s 10 sectors at $3.95 trillion, this week will be a busy one for tech earnings right out of the gate and give investors an early preview of how the second quarter fared against the weather-beaten first quarter.

Tech companies are expected to see above-average growth compared to the rest of the S&P 500 at 7.3%. The largest cap tech earnings this week come from Google Inc.
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on Thursday.

“Tech is one of those wonderful indicators,” Colas said. “In aggregate, it’s a great barometer of overall growth.” The sector shows a balanced picture by cutting across both consumer and business spending with continuously updating product cycles, he said.

Financials to provide the big counterpoint

While tech is seen as an above-average performer this earnings season, financial stocks, the second-largest sector by market cap in the S&P 500 at $3.01 trillion, are also expected to be the worst performer of the ten.

Financial companies are expected to see a decline in earnings of 3.9%. It’s the only sector out of ten expected to see an overall decline, and would mark the second-consecutive quarter decline in earnings for the sector, according to Butters. Revenue for the sector is only expected to grow by 0.7%.

Here’s what some of the Wall Street houses reporting this week have to say about earnings season for the broader market:

Goldman Sachs, in addition to pointing out 22 stocks that are likely to beat earnings expectations this season, said it will be looking out for less uncertainty from company managers, which should boost capital expenditure and mergers and acquisitions spending. Also, look for companies where analysts have lowered earnings analysts during the quarter. Those companies are more likely to miss those estimates, compared to those companies where analysts have not changed or raised estimates, the firm said.

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